Samuel Shen and John Ruwitch; Editing by Kim Coghill, Reuters

China's banking regulator has drafted rules that will require lenders to tighten risk management in derivatives trading, a business the watchdog said has been expanding rapidly in recent years.

Lenders must set up sound policies and procedures in dealing with risks stemming from derivative trading, and must include counterparty credit risk management, the China Banking Regulatory Commission (CBRC) said on its website on Monday.

The rules, which were based on methods published by the Basel Committee on Banking Supervision in 2014, is aimed at "strengthening commercial banks' ability to manage risks stemming from derivative tools," CBRC said.

China has been stepping up efforts to ward off financial risks, strengthening supervision in areas that previously received inadequate regulatory attention, including shadow banking and derivatives trading.

For example, China's securities regulator has restricted index futures trading since the mid-2015 stock market crash, and has also banned the use of over-the-counter (OTC) derivatives as a financing channel. Read more